[Code of Federal Regulations]
[Title 26, Volume 17]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR53.4945-1]

[Page 160-163]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 53_FOUNDATION AND SIMILAR EXCISE TAXES--Table of Contents
 
                 Subpart F_Taxes on Taxable Expenditures
 
Sec. 53.4945-1  Taxes on taxable expenditures.

    Source: T.D. 7215, 37 FR 23161, Oct. 31, 1972, unless otherwise 
noted.


    (a) Imposition of initial taxes--(1) Tax on private foundation. 
Section 4945(a)(1) of the Code imposes an excise tax on each taxable 
expenditure (as defined in section 4945(d)) of a private foundation. 
This tax is to be paid by the private foundation and is at the rate of 
10 percent of the amount of each taxable expenditure.
    (2) Tax on foundation manager--(i) In general. Section 4945(a)(2) of 
the Code imposes, under certain circumstances, an excise tax on the 
agreement of any foundation manager to the making of a taxable 
expenditure by a private foundation. This tax is imposed only in cases 
in which the following circumstances are present:
    (a) A tax is imposed by section 4945(a)(1);
    (b) Such foundation manager knows that the expenditure to which he 
agrees is a taxable expenditure, and
    (c) Such agreement is willfull and is not due to reasonable cause.

However, the tax with respect to any particular expenditure applies only 
to the agreement of those foundation managers who are authorized to 
approve, or to exercise discretion in recommending approval of, the 
making of the expenditure by the foundation and to those foundation 
managers who are members of a group (such as the foundation's board of 
directors or trustees) which is so authorized. For the definition of the 
term foundation manager, see section 4946(b) and the regulations 
thereunder.
    (ii) Agreement. The agreement of any foundation manager to the 
making of a taxable expenditure shall consist of any manifestation of 
approval of the expenditure which is sufficient to constitute an 
exercise of the foundation manager's authority to approve, or to 
exercise discretion in recommending approval of, the making of the 
expenditure by the foundation, whether or not such manifestation of 
approval is the

[[Page 161]]

final or decisive approval on behalf of the foundation.
    (iii) Knowing. For purposes of section 4945, a foundation mangager 
shall be considered to have agreed to an expenditure ``knowing'' that it 
is a taxable expenditure only if:
    (a) He has actual knowledge of sufficient facts so that, based 
solely upon such facts, such expenditure would be a taxable expenditure,
    (b) He is aware that such an expenditure under these circumstances 
may violate the provisions of federal tax law governing taxable 
expenditures, and
    (c) He negligently fails to make reasonable attempts to ascertain 
whether the expenditure is a taxable expenditure, or he is in fact aware 
that it is such an expenditure.

For purposes of this part and Chapter 42, the term knowing does not mean 
``having reason to know''. However, evidence tending to show that a 
foundation manager has reason to know of a particular fact or particular 
rule is relevant in determining whether he had actual knowledge of such 
fact or rule. Thus, for example, evidence tending to show that a 
foundation manager has reason to know of sufficient facts so that, based 
solely upon such facts, an expenditure would be a taxable expenditure is 
relevant in determining whether he has actual knowledge of such facts.
    (iv) Willful. A foundation manager's agreement to a taxable 
expenditure is willful if it is voluntary, conscious, and intentional. 
No motive to avoid the restrictions of the law or the incurrence of any 
tax is necessary to make an agreement willful. However, a foundation 
manager's agreement to a taxable expenditure is not willful if he does 
not know that it is a taxable expenditure.
    (v) Due to reasonable cause. A foundation manager's actions are due 
to reasonable cause if he has exercised his responsibility on behalf of 
the foundation with ordinary business care and prudence.
    (vi) Advice of counsel. If a foundation manager, after full 
disclosure of the factual situation to legal counsel (including house 
counsel), relies on the advice of such counsel expressed in a reasoned 
written legal opinion that an expenditure is not a taxable expenditure 
under section 4945 (or that expenditures conforming to certain 
guidelines are not taxable expenditures), although such expenditure is 
subsequently held to be a taxable expenditure (or that certain proposed 
reporting procedures with respect to an expenditure will satisfy the 
tests of section 4945(h), although such procedures are subsequently held 
not to satisfy such section), the foundation manager's agreement to such 
expenditure (or to grants made with provision for such reporting 
procedures which are taxable solely because of such inadequate reporting 
procedures) will ordinarily not be considered ``knowing'' or ``willful'' 
and will ordinarily be considered ``due to reasonable cause'' within the 
meaning of section 4945(a)(2). For purposes of the subdivision, a 
written legal opinion will be considered ``reasoned'' even if it reaches 
a conclusion which is subsequently determined to be incorrect so long as 
such opinion addresses itself to the facts and applicable law. However, 
a written legal opinion will not be considered ``reasoned'' if it does 
nothing more than recite the facts and express a conclusion. However, 
the absence of advice of counsel with respect to an expenditure shall 
not, by itself, give rise to any inference that a foundation manager 
agreed to the making of the expenditure knowingly, willfully, or without 
reasonable cause.
    (vii) Rate and incidence of tax. The tax imposed under section 
4945(a)(2) is at the rate of 2\1/2\ percent of the amount of each 
taxable expenditure to which the foundation manager has agreed. This tax 
shall be paid by the foundation manager.
    (viii) Cross reference. For provisions relating to the burden of 
proof in cases involving the issue whether a foundation manager has 
knowingly agreed to the making of a taxable expenditure, see section 
7454(b).
    (b) Imposition of additional taxes--(1) Tax on private foundation. 
Section 4945(b)(1) of the Code imposes an excise tax in any case in 
which an initial tax is imposed under section 4945(a)(1) on a

[[Page 162]]

taxable expenditure of a private foundation and the expenditure is not 
corrected within the taxable period (as defined in section 4945(i)(2)). 
The tax imposed under section 4945(b)(1) is to be paid by the private 
foundation and is at the rate of 100 percent of the amount of each 
taxable expenditure.
    (2) Tax on foundation manager. Section 4945(b)(2) of the Code 
imposes an excise tax in any case in which a tax is imposed under 
section 4945(b)(1) and a foundation manager has refused to agree to part 
or all of the correction of the taxable expenditure. The tax imposed 
under section 4945(b)(2) is at the rate of 50 percent of the amount of 
the taxable expenditure. This tax is to be paid by any foundation 
manager who has refused to agree to part or all of the correction of the 
taxable expenditure.
    (c) Special rules--(1) Joint and several liability. In any case 
where more than one foundation manager is liable for tax imposed under 
section 4945 (a) (2) or (b)(2) with respect to the making of a taxable 
expenditure, all such foundation managers shall be jointly and severally 
liable for the tax imposed under such paragraph with respect to such 
taxable expenditure.
    (2) Limits on liability for management. The maximum aggregate amount 
of tax collectible under section 4945(a)(2) from all foundation managers 
with respect to any one taxable expenditure shall be $5,000, and the 
maximum aggregate amount of tax collectible under section 4945(b) (2) 
from all foundation managers with respect to any one taxable expenditure 
shall be $10,000.
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). A, B, and C comprise the board of directors of 
Foundation M. They vote unanimously in favor of a grant of $100,000 to 
D, a business associate of each of the directors. The grant is to be 
used by D for travel and educational purposes and is not made in 
accordance with the requirements of section 4945(g). Each director knows 
that D was selected as the recipient of the grant solely because of his 
friendship with the directors and is aware that some grants made for 
travel, study, or other similar purposes may be taxable expenditures. 
Also, none of the directors makes any attempt to consult counsel, or to 
otherwise determine, whether this grant is a taxable expenditure. 
Initial taxes are imposed under paragraphs (1) and (2) of section 
4945(a). The tax to be paid by the foundation is $10,000 (10 percent of 
$100,000). The tax to be paid by the board of directors is $2,500 (2\1/
2\ percent of $100,000). A, B, and C are jointly and severally liable 
for this $2,500 and this sum may be collected by the Service from any 
one of them.
    Example (2). Assume the same facts as in example (1). Further assume 
that within the taxable period A makes a motion to correct the taxable 
expenditure at a meeting of the board of directors. The motion is 
defeated by a two-to-one vote, A voting for the motion and B and C 
voting against it. In these circumstances an additional tax is imposed 
on the private foundation in the amount of $100,000 (100 percent of 
$100,000). The additional tax imposed on B and C is $10,000 (50 percent 
of $100,000 subject to a maximum of $10,000). B and C are jointly and 
severally liable for the $10,000, and this sum may be collected by the 
Service from either of them.

    (d) Correction--(1) In general. Except as provided in paragraph (d) 
(2) or (3) of this paragraph, correction of a taxable expenditure shall 
be accomplished by recovering part or all of the expenditure to the 
extent recovery is possible, and, where full recovery cannot be 
accomplished, by any additional corrective action which the Commissioner 
may prescribe. Such additional corrective action is to be determined by 
the circumstances of each particular case and may include the following:
    (i) Requiring that any unpaid funds due the grantee be withheld;
    (ii) Requiring that no further grants be made to the particular 
grantee;
    (iii) In addition to other reports that are required, requiring 
periodic (e.g., quarterly) reports from the foundation with respect to 
all expenditures of the foundation (such reports shall be equivalent in 
detail to the reports required by section 4945(h)(3) and Sec. 53.4945-
5(d));
    (iv) Requiring improved methods of exercising expenditure 
responsibility;
    (v) Requiring improved methods of selecting recipients of individual 
grants; and
    (vi) Requiring such other measures as the Commissioner may prescribe 
in a particular case.

The foundation making the expenditure shall not be under any obligation 
to attempt to recover the expenditure by legal action if such action 
would in

[[Page 163]]

all probability not result in the satisfaction of execution on a 
judgment.
    (2) Correction for inadequate reporting. If the expenditure is 
taxable only because of a failure to obtain a full and complete report 
as required by section 4945(h)(2) or because of a failure to make a full 
and detailed report as required by section 4945(h)(3), correction may be 
accomplished by obtaining or making the report in question. In addition, 
if the expenditure is taxable only because of a failure to obtain a full 
and complete report as required by section 4945(h)(2) and an 
investigation indicates that no grant funds have been diverted to any 
use not in furtherance of a purpose specified in the grant, correction 
may be accomplished by exerting all reasonable efforts to obtain the 
report in question and reporting the failure to the Internal Revenue 
Service, even though the report is not finally obtained.
    (3) Correction for failure to obtain advance approval. Where an 
expenditure is taxable under section 4945(d)(3) only because of a 
failure to obtain advance approval of procedures with respect to grants 
as required by section 4945(g), correction may be accomplished by 
obtaining approval of the grant making procedures and establishing to 
the satisfaction of the Commissioner that:
    (i) no grant funds have been diverted to any use not in furtherance 
of a purpose specified in the grant;
    (ii) the grant making procedures instituted would have been approved 
if advance approval of such procedures had been properly requested; and
    (iii) where advance approval of grant making procedures is 
subsequently required, such approval will be properly requested.
    (e) Certain periods--(1) Taxable period. For purposes of section 
4945, the term ``taxable period'' means, with respect to any taxable 
expenditure, the period beginning with the date on which the taxable 
expenditure occurs and ending on the earlier of:
    (i) The date of mailing of a notice of deficiency under section 6212 
with respect to the tax imposed on taxable expenditures by section 
4945(a)(1); or
    (ii) The date on which the tax imposed by section 4945(a)(1) is 
assessed.
    (2) Cross reference. For rules relating to taxable events that are 
corrected within the correction period, defined in section 4963(e), see 
section 4961(a) and the regulations thereunder.

[T.D. 7215, 37 FR 23161, Oct. 31, 1972, as amended by T.D. 7299, 38 FR 
35305, Dec. 27, 1973; T.D. 7527, 42 FR 64625, Dec. 27, 1977; T.D. 8084, 
51 FR 16303, May 2, 1986]